In an article for Politico, Jacob Hacker lays out his vision for rescuing retirement–universal private retirement savings that become a defined benefit upon retirement, an annuity paid by Social Security –“Social Security Plus”–on top of Social Security benefits. How much would this help working people in retirement?
Hacker explains that as a result of flawed social policies over the last 25 years, government and businesses have laid tremendous economic risk onto working people and their families. Among other things, unions have lost their influence, companies have been less caring of their workers. As a result, people are at risk in their jobs, their health, their education and their shelter.
Hacker describes this change as the Great Risk Shift. And, he says retirees have been hit particularly hard. No longer do most retirees have a defined pension. At best, if they are lucky, they might have a defined pot of money that can get wiped out by a market crash, which does not guarantee them set benefits. On top of that Social Security benefits have shrunk as a percent of retiree income from 50 percent at the end of the 20th century to 40 percent in the next several years.
Today, it is projected that the majority of young workers will not be able to continue to live as they have while working when they retire. For that they need about 70 percent of pre-retirement income. In 1983, less than a third of them were at risk of not maintaining their standard of living in retirement.
Inadequate retirement savings hurts retirees as well as the US economy. And, according to Hacker, the solution needs to be a resetting of the risk, not an admonition to people to save more. People need to be in a situation where they can save more automatically. They also need government protection of these savings, just as the government does with Social Security.
Hacker has a plan, which includes these two smart solutions. Instead of the government subsidizing the retirement savings for the wealthy to the tune of some $200 billion a year through tax-deferred accounts such as 401(k) plans, the government should take that money to encourage retiree savings for people with lower incomes. He further suggests that Congress should expand Social Security by raising or removing the cap on payroll contributions and requiring contributions on investment income.
Hacker also argues that Social Security benefits should be higher for vulnerable populations. And, rather than raising the retirement age, which hurts low-wage workers in particular, we should allow people to retire early but offer greater benefits if they can delay retirement.
Hacker then makes the case that 401(k) savings plans should be universal. All workers should be able to take advantage of them. Today many are not. Hacker wants to require everyone to contribute to 401(k) plans to help ensure people save enough, with some opt out rights. But, his plan as described in Politico does not take into account that many, if not most, working people do not have any disposable income to spare.
Hacker recommends that the $200 billion that subsidizes retiree savings of wealthy people today to go to match savings of lower-wage individuals. But, if these individuals cannot afford to save, his plan is of no help to them. Moreover, to the extent workers are able to save, 401(k) fees can eat into retiree savings significantly.
To protect worker savings as much as possible, Hacker argues that 401(k) and IRA investments should be in low-cost index funds. On top of that, Hacker proposes turning these retiree savings into a defined benefit plan upon retirement, with guaranteed monthly income for life–essentially an annuity paid by Social Security–“Social Security Plus.” Hacker says that “We should make [Social Security Plus] the model for a transformed private system that actually provides retirement security.
The unanswered question is how will this plan help the millions of workers who cannot afford to put money into a 401(k) plan? Removing the cap on Social Security contributions and allowing people to invest more money in Social Security in order to enhance their Social Security benefits seem like simpler and more compelling solutions for improving retirement security.